Every year for over a decade, I have taken time around the turn of the year to do the following:
- Calculate my net worth
- Review and categorize my spending
- Write down goals for my money, and decide how I will fund them.
I recommend this as a yearly exercise for those who want to keep an eye on their money.
This year, thanks to my travel plans, I got to this a little later than usual. I thought I would go through the process here for you.
Calculate net worth
Strictly speaking, this is all of your assets (cash, investments, real estate, valuables that you can actually get money for) minus your liabilities (mortgage, car loans, credit card debt, money you owe your brother).
When I calculate this each year, I am more interested in cash or liquid assets (like stocks)–basically, I want to know how much money I could put my hands on without too much work. I personally leave out the estimated value of my house because (1) I don’t quite believe the estimations on Zillow and (2) cleaning up and selling the house will not be something I want to do in a hurry. I do the same for my car, or any other expensive item which officially contributes to my net worth, but would be a pain to turn into cash (that is, I don’t count them).
I spend a few minutes to add up the amount in the checking accounts, the savings accounts, the brokerage account, and the retirement accounts (Roth and traditional). I like to look at the subtotals of cash/taxable investments (available immediately) and retirement accounts (more easily accessed after 59 and 1/2 or later).
From this total, I subtract the mortgage total (dropping each year), student loan obligations (now gone!) and car loan (I’m not altogether pleased to have one, though it serves its purpose).
I can compare numbers from years past, and could probably graph them if I wished (maybe next year).
I can look back over several years and see how much my mortgage has dropped since the end of 2015. My goal is to get rid of this entry for 2019, but we will see if I can make this happen.
I am in the happy place where I have a positive net worth, and it goes up every year. I have enough investments in stocks now that fluctuations in my net worth have more to do with how the stock market is doing, rather than due to my savings efforts. For example, in 2017, my net worth went up more than my W-2 income. The flip side of this also applies: for 2018, I think my net worth grew by less than what I had saved.
review and categorize spending
I review all my spending and divide this into categories. This used to be tedious, as I would have to go over my checking account and credit card accounts, write down each payment in its own category, and then add them up. Over the whole year, this was a lot of numbers to add.
Nowadays, credit cards make this easy, by letting you review your spending by category. My bank lets me do this too, at least for easy categories like the utility companies.
Some things are very easy: the monthly mortgage payment, the monthly car payment. Some are moderately easy to figure out: my bank can tell me quickly how much I sent over the year to the electric company, water company, phone company, insurance company, etc.
Some categories are still tedious: adding up groceries, figuring out whether a meal out counts as a restaurant visit or a travel expense, and was that Amazon purchase a book, a gift, or an household item?
I try to keep similar categories year to year, but sometimes my spending just changes, and it’s not worthwhile keeping some categories, or I need to add new ones. I no longer support a college student, and that category is happily zeroed. My Kindle spending, however, got broken out a few years ago when it seemed like it was getting out of hand.
I hear apps like Mint or YNAB (You Need a Budget) can help with this, but I don’t use them myself and thus won’t make any recommendations.
By the end of this process, I have the monthly averages for a number of categories. I can compare spending in each category over time. For example, I can see that recently I have cut back on my purchases of clothing and shoes (down 33%) but our utility bills have risen (by 14%). And this year we spent a little less on travel, only 81% of last year’s amount–probably due to our attempts at travel hacking.
The other benefit of doing this is that I now have a good idea of how much we are spending each year to maintain our desired lifestyle. This helps when I am trying to figure out how much we need for an emergency fund, or what we might want to spend in retirement.
The ultimate goal is to make sure that we are spending on what we think is important. Heat and running water are good, travel is better, and I’m happy to see that we spend more on the latter than the former.
write down money goals
This is where the money is (pun intended) in these exercises.
Every year, I set some money goals, and give the money I have sitting in accounts a job.
- We have an emergency fund (6-9 months of expenses) in case I lose my job or become disabled and can’t work.
- I put money aside to pay for a new (or new to us) car, for when the current one needs to be replaced.
- There is money for “unexpected” house expenses. I say “unexpected” because although I never know when something will break, I know eventually something will. So far, there’s been a water heater to replace, a roof to repair, a garage door gear to replace (that was a winner–car stuck in the garage 2 days before a road trip to see family).
- These are different from planned expenses, like getting a new dishwasher, a new washer/dryer, or new carpeting (still working on that one). Those we save for separately.
- Of course, we have our travel fund. This gets topped off every year.
Each year I write down some other goals: paying down the mortgage, paying off student debt (done!), sending more money to the taxable investment account, saving for a piano.
This helps me focus my attention on 1 or 2 money goals for the year that I can achieve. I can’t do all of them–not with an internist’s salary–but it helps me decide what to do when extra money becomes available, such as at bonus time. For the past few years, extra money has been going to the mortgage; but as the mortgage payoff date approaches, I know that extra money will be going to the taxable investment account. Maybe a portion will be siphoned off to the piano account, we’ll see.
In Summary
To summarize, every year I spend some time to:
- Calculate our net worth.
- Review where the money we spend is going.
- Decide where extra money throughout the year will go.
I think by doing this exercise regularly, it helps focus attention on the larger goals (how much do we need for retirement? Do we have that much saved yet? What other big goal do we have for this year?). Once these larger goals are taken care of, the smaller spending amounts seem to settle out.
Do you have your own year-end money practice? Do you do something like this, but more frequently? Does this all sound like too much work for you?